Small finance banks offer higher interest on FDs than larger banks, but should you opt for them?

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Updated: January 24, 2019 12:35:33 PM

Other than big banks like SBI, ICICI, HDFC, Kotak, Axis, newly-launched small finance banks like Ujjivan, Jana, AU are offering higher rates of interest on FDs.

fixed deposit, FDs, fixed deposit interest rates, small finance banks, FDs of small finance banks, SBI, HDFC, ICICI, Axis Bank The interest rates of FDs have been going up for some time, especially since the Reserve Bank of India has started hiking its key policy rates this year.

Fixed deposit (FD) as an investment tool is opted by a wide demographic in India. Especially for those with low-risk appetite and investors who want a balanced portfolio, FD is a good option.  However, to invest your money in a bank FD, choosing the right bank to park your money can become confusing. The interest rate offered is what drives the choice of a bank.

Other than big banks like SBI, ICICI, HDFC, Kotak, Axis, newly-launched small finance banks like Ujjivan, Jana, AU are offering higher rates of interest on FDs. Currently, for a 1-2 year FD, they are offering 8.5 per cent interest and 8 per cent for a 12-15 month FD, whereas SBI is offering 6.8 per cent and HDFC is offering 7.3 per cent interest for a 1-year FD.

The interest rates of FDs have been going up for some time, especially since the Reserve Bank of India has started hiking its key policy rates this year. But does this make small finance bank FDs the best bet to invest in to take advantage of their higher interest rate? Experts suggest that as these banks are new in the market compared to other established players, they are offering higher rates of interest to attract customers. But should investors take the bait?

Experts suggest investors should note that interest rates on fixed deposits vary depending on the banks. For instance, currently, the maximum interest rates on fixed deposits are being offered by small finance banks, ranging between 8 per cent to 9 per cent, while the leading banks like SBI, ICICI, and HDFC Bank are offering maximum interest rates of 6.85 per cent to 7.50 per cent per annum.

SMALL FINANCE BANKS
Bank Name
Highest available interest rate
TenureRegular interest rateInterest rate for Senior citizens
Fincare Small Finance Bank24 months 1 day to 36 months9.00%9.50%
Ujjivan Small Finance Bank799 days8.60%9.10%
Equitas Small Finance Bank2 years 1 day to 3 years8.80%9.55%
Jana Small Finance Bank3 years9.00%9.75%
ESAF Small Finance Bank365 days to 727 days8.75%9.25%
Suryoday Small Finance Bank950 days9.00%9.50%
Utkarsh Small Finance Bank456 Days to less than 2 years9.00%9.50%
Capital Small Finance Bank400 days7.85%8.35%
North East Small Finance Bank1 year to less than 2 years8.50%9.00%
AU Small Finance Bank24 Months 1 Day to 36 Months8.50%9.00%
Source : Paisabazaar.com

Industry experts suggest, though investing in the FDs of small finance banks can fetch you higher returns, investment in these avenues may be a bit risky compared to bank FDs. One should take all precautions, and do their own research before investing in the FDs offered by smaller banks. Though the interest rates offered by small finance banks are higher, many investors worry about the stability of those banks. It is because of the past track record of the government and the RBI in dealing with failed banks.

To start with, investors should review how secure the bank is. For instance, one should check their records and agency ratings (CRISIL rating) that indicates how safe the bank is. For a fixed deposit whose tenor is greater than a year, FAAA or FAA is the best rating. Whereas, CRISIL A1+ is the rating you should look for if you plan to invest for less than 12 months.

It is also better to be safe than sorry. Hence, if you decide to invest Rs 2 lakh in the FDs overall, according to experts, you should park only 25 per cent of the amount in a new bank’s FD offering higher interest, which will limit your risk exposure, and the rest in bigger banks.

With the increase in the interest rates, FDs have also become a preferred investment option for senior citizens as the interest rates offered are higher compared to those offered to regular customers. These small banks offer an additional 0.5 per cent to 0.06 per cent for senior citizens which is also higher than other commercial banks. This works well for the senior citizens as they do not have many avenues available for saving tax under Section 80C. Also, with the introduction of Section 80TTB, bank FDs have become more attractive to the senior citizens as it comes with a deduction for all bank interests up to Rs 50,000 to resident senior citizens.

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